Transactions involving at least two individuals (including individuals representing businesses) in different locations are quite common.
One example of such transactions are those involving financial institutions.
There are many definitions of financial institutions. Generally speaking, a financial institution can be broadly defined as any organization in the business of moving, investing or lending money, dealing in financial instruments, or providing financial services. Financial institutions can be divided into two sub categories: banks and depository institutions and securities and investment institutions.
Banks and depository institutions include commercial banks and consumer institutions. These are institutions that are able to receive deposits from their customers. Typically they deal with money, hold money, invest money and lend money. The most important type of these institutions are commercial banks and similar organizations such as credit unions, trust companies and savings and loans which accept deposits from, and deal directly with, consumers. Money transmitters are also considered part of this group because they accept deposits and hold funds until they are transmitted to a final destination.
In addition to consumer institutions, there are financial institutions that deal directly with other banks such as the central banks of each country. These are banks that provide financial and banking services to the government of a country and its commercial banking system. They are capable of accepting deposits from commercial banks and providing credit to the commercial institutions. Most independent countries in the world have their own central bank. The exceptions are normally countries that are closely affiliated with others in the same currency zone.
Over and above national and central banks, there are a number of financial institutions that transcend individual national interests and encompass many member nations (supranational). These institutions are usually funded by member nations who make deposits according to prescribed formulae. The capital deposited can then be used for financing a member country's specific requirements. The International Monetary Fund and the World Bank are examples of supranational institutions.
Securities and investment institutions are institutions that manage and organize offerings of securities such as stocks and bonds for sale to the public, sell and trade securities and provide investment advice. In addition to stocks and bonds, these institutions may also buy and sell mutual funds, currencies and commodities.
The distinction between commercial banks and securities institutions has been somewhat blurred in recent years as the banks now typically sell mutual funds to their clients. However, investment agents/dealers and brokers specialize in securities and do not offer most banking services.
Securities companies are normally licensed to work with and sell/trade securities and are regulated closely by government agencies and trading exchanges. As might be expected, there is cross ownership and some of the large securities firms are controlled by the major banks.
The increasing worldwide integration of markets for goods, services, labour and capital makes it impossible to quantify the world markets that financial institutions operate in. Electronic communication means it takes seconds for transactions to be executed that could have at one time taken days.
Commercial banks are the institutions that are by far most numerous and involve the largest number of customers, and, as distinct from central banks and investment banks, offer a broad range of products and services to both individuals and businesses including: chequing and savings accounts, time deposits and loans. Within commercial banks, retail banking is the part of the bank's operations providing services to individual customers, as opposed to businesses.
A bank's retail operation has by far the broadest interaction with customers. Day-to-day banking activities are the ones experienced by the vast majority of customers on a frequent basis such as management of chequing or savings accounts, cash withdrawals and deposits, payment of bills, etc. Depending on the individual customers, other products such as overdrafts and consumer credit, including credit cards, and even insurance products and real estate transactions may also require frequent interaction.
Very few commercial establishments are as ubiquitous throughout the world as banks and related institutions.
It is difficult to identify how many banks and bank branch offices there are throughout the world because many countries have banks that operate only locally, but it is safe to say that the number is in the tens of thousands. According to figures provided by Canada's Department of Finance, Canada alone has close to 6,000 bank branches.
A study released in March, 2006 by the consulting firm, ACCENTURE™, shows banks are very optimistic about their growth prospects. The study, based on a survey of more than 100 retail bank executives in the U.S., Europe and Asia-Pacific, was designed to shed light on growth strategies. More than two-thirds of respondents said they will concentrate equally on retaining existing customers and attracting new ones. Key strategies include: improving data connecting capabilities with sales force workstations; channel integration to enable a single-customer view and increasing self-service access points.
According to a J.D. Power and Associates' “2006 Retail Banking Satisfaction Study”, transaction interaction has the greatest impact on a U.S. customer's overall satisfaction with his/her bank. With transaction times nearly three times faster than interacting with a branch teller, on-line banking is the preferred transaction method. However, in-person branch transactions are conducted most frequently and are highest in satisfaction, followed by Automated Teller Machines or “ATM”'s and on-line transactions.
A survey conducted for the Canadian Bankers Association in 2004 indicated ATM transactions, in fact, exceed in-person transactions in Canada. While Canada has always had one of the highest ATM usage rates in the world, this confirms the importance of ATM's as a transaction vehicle. To be sure, in-person transactions are still very important (29% versus 34% for ATM's). Customers want the speed of ATM's and on-line transactions yet crave the personal interaction and attention.
J.D. Power found a strong positive relationship between customer commitment levels and the number of revenue-generating products a customer utilizes. In other words, the more frequent the interactions with the bank for different products or services, the more committed and loyal the customer is. Also, these customers tend to recommend their bank more often.
As far as ATM usage is concerned, the number of terminals continues to increase, with rapid growth in both the U.S. and in Canada. There appears to be a push to increase the growth of off-premise ATM's by using wireless telecom connections as opposed to land lines. This will not only reduce deployment and maintenance costs, but make installation simple and—most importantly—reduce transaction times.
A credit union is a financial cooperative organization of individuals with a common affiliation such as employment, labour union membership or place of residence. The organization is typically a non-profit corporation owned and operated by its members. Credit unions offer similar products and services to those provided by a bank's retail arm, including accepting deposits and providing credit card and loan facilities. The offering is not as broad as that of the banks and the customer base is limited to membership in the credit union. Trends in the credit union business are similar to those in banking and focus on increasing automation while maintaining customer satisfaction. Credit unions continue to expand their product offering including mortgage lending and credit cards. Some have also relaxed membership requirements in an effort to attract more members.
Savings and loans, also called Thrifts, are a type of depository financial institution found in the United States. An S & L accepts deposits from consumers and holds the majority of its assets in home mortgages. They are often mutually held (often called mutual savings banks), meaning the depositors and borrowers are members with voting rights and have the ability to direct the managerial goals of the organization. In some cases a savings and loan can issue stock and be publicly traded and members no longer have direct managerial control. Today, S & L's are virtually indistinguishable from banks in their product offerings and some even call themselves banks. One key difference is the S & L's focus on marketing themselves as community-oriented, home-lending specialists. Beyond this, automation and other trends are similar to those in the banking industry.
A trust company is either a type of commercial bank or a division of a bank, which specializes in being a trustee of various kinds of trusts and managing estates. Historically, trust companies had to be operated as stand-alone companies, separate from banks or other companies. Since this is no longer required, trust companies are usually divisions of a bank or other financial institution that provides the services associated with the original trust companies. Modern-day trust companies act as trustees—someone who administers financial assets on behalf of another. A trustee will manage investments, keep records, manage assets and prepare court accounting, pay bills and distribute income and principal as stipulated in the individual trust agreement. In some countries, like Canada, trust companies can also offer day-to-day banking services to consumers. Although independent, trust companies offer many bank-like services, the nature of trust agreement work usually requires personal interaction. These companies are therefore limited in how much automation they can incorporate.
Money transmitters are specialized deposit institutions that focus on sending or transmitting money to other locations. While other services may be provided, the typical transmitter accepts a deposit at a local office and charges a fee for delivering the equivalent amount in local currency to a location of the depositor's choice. Transmitter companies are usually corporations and may be owned by large financial institutions like AMERICAN EXPRESS™ or WESTERN UNION™. Like bank branches, money transmitters' locations are also numerous. They typically serve the needs of expatriates and/or immigrant workers who remit money back home. In the U.S. and Canada, there are, for example, many migrant farm workers who remit money regularly to their homes in Mexico, Central America or elsewhere. The practice is quite prevalent throughout the world, and in some countries remittances from citizens working abroad is one of the single largest sources of foreign exchange. Countries like India, Pakistan, the Philippines, Bangladesh, etc. supply large parts of the labour pool in oil-wealthy middle-eastern countries. Because of this, money transmitter offices are quite large in numbers. The money transmitting business, although considered a depository business, is quite different from banking. First of all, it is largely a cash business with depositors bringing cash in to be transmitted elsewhere. This makes it more difficult to use ATM's or other forms of automation. However, there are security issues associated with the handling of cash that would likely benefit from remote signing and interaction. In addition, remote interaction would serve as instant confirmation that the money has been received.
The securities industry raises capital for businesses and governments, sells and trades securities, and provides investment advice. Firms that act as securities agents and investment dealers buy and sell stocks, bonds, treasury bills, mutual funds and other securities for individual investors, pension fund managers, banks, trust companies, insurance firms and other establishments. Brokerage firms buy and sell stocks, bonds, commodity futures, foreign currencies and other securities at stock and other exchanges on behalf of investment dealers. In addition to buying and selling according to prescribed regulations, agents and dealers provide information to, and develop relationships with, clients. Brokers, on the other hand, perform similar duties but work directly with investment dealers as opposed to the ultimate clients. Investment advisors typically focus on providing financial planning and advice and may not get directly involved in trading activities.
There are three main categories of firms that make up the securities industry:
(1) Retail: Retail firms include full-service firms and discount brokers. Full-service firms offer a wide variety of products and services for the retail (individual) investor including: research and advice; buying and selling and; monitoring and reporting. Discount brokers execute trades over the telephone and over the Internet for clients at reduced rates, but generally do not provide advice. They are popular with more knowledgeable clients who are willing to research companies themselves in exchange for lower commissions.
(2) Institutional: These firms specialize in serving institutional clients such as pension funds, insurance companies and other investment firms.
(3) Integrated: These firms offer products and services that cover all aspects of the industry, including full participation in both the institutional and retail markets. These are typically very large firms and they provide investment advice as well as trading and management services. Some of the largest of these firms are owned by, or affiliated with, major banking institutions.
Like commercial bank branches, securities firms often have extensive branch networks. These networks are particularly large in the more developed economies of the U.S., Canada, Western Europe and Japan.
Paralleling the depository institutions, key trends in the securities industry are the result of increased automation and globalization. The trends summarized here refer to the U.S. market, but are applicable to Canada and other developed countries.
Cross-border trading refers to the increasing willingness of investors in one country to invest in the securities of another. Cross-border trading has increased substantially in recent years, resulting from both automation and the broader availability of investment vehicles and information.
Along with this, on-line trading (trading securities via the Internet) continues to attract a significant number of investors from around the world.
It should be understood that in this disclosure “financial institutions” refers collectively to all types of financial institutions such as the various financial institutions referred to above, including various types of banks, depository institutions, securities institutions, investment institutions, trust companies, money transmitters, credit unions and so on, as well as similar organizations existing or to be conceived.
Financial Transactions
The following transactions are relevant to commercial banks and also to credit unions and S & L's, which offer many of the same services as banks. These transactions may take place at the branch, on-line, at ATM's, or by telephone, as applicable and/or feasible. This list is not exhaustive.
(1) Account management (savings, chequing, other): including opening an account, closing an account, depositing funds, withdrawing funds, cashing cheques, transferring funds between accounts, and obtaining account balances.
(2) Making payments (utility bills, taxes, credit card bills, other): via debit card, credit card, direct debit, personal or business cheques, certified cheques, in cash, and wire transfer.
(3) Credit arrangements/applications: including overdraft, line of credit, personal loan, vehicle loan, mortgages, applying for credit or debit card, and increasing credit card limit.
(4) Investment management (deposits, withdrawals, trades, etc.): including certificates of deposit or guaranteed investment certificates, mutual funds, retirement accounts—deposits/withdrawals, and other investment vehicles.
(5) Special requests: including ordering cheques, replacing a credit or debit card, cancelling a credit or debit card, stopping payment on a cheque, regularly scheduled transfers or deposits, question billings or statements, and general inquiries.
(6) Other products (purchase, sell, other): including new home, auto, life insurance, change terms of existing insurance, creating or altering trust agreements.
The following transactions are relevant to central banks. This list is not exhaustive.
(1) Currency issue and management: including relaying information to design or printing firms, distributing currency to commercial banks, and taking old currency out of circulation.
(2) Investment management: including issuing and selling treasury bills, bonds and other securities, purchasing and selling foreign currency reserves, purchasing and selling gold and other reserves, purchasing and selling securities to manage liquidity, lending funds to commercial banks, and investing surplus funds in term deposits.
The following transactions are relevant to supranational institutions. This list is also not exhaustive.
(1) Credit arrangements/applications: including accepting/reviewing applications from member governments, depositing approved loans at designated institutions, altering the terms of a loan/credit agreement, receiving payments of principal and/or interest, and purchasing and selling gold, foreign currency and other reserves.
(2) Performance agreements (on inflation, exchange rates, etc.): including reviewing and executing agreements with member governments, altering terms of existing agreements and terminating agreements.
The following transactions are relevant to money transmitters. This list is not exhaustive.
(1) Accepting deposits: including in cash, by debit card (on line, in person or by phone), by credit card (on line, in person or by phone), bank draft or certified cheque or otherwise.
(2) Agreement interaction: including filling out transfer applications, monitoring transfer/order status, and questioning fees, transfer times, or otherwise.
Retail securities, as with retail banking, generally require that the transactions be conducted in person, over the telephone, or via the Internet where there is some means of authentication. The following transactions are relevant to retail securities. This list is not exhaustive.
(1) Account management: including opening an account, closing an account, obtaining account balances, reviewing holdings, deposit funds, withdrawing funds, and applying for credit or margin.
(2) Trading: including placing sell orders, placing buy orders, reviewing order status, reviewing commission structure, reviewing settlement dates, and obtaining quotations.
(3) Advisory services: including requesting research and/or reports, specific inquiries about a company, requesting buy/sell recommendations, reviewing portfolio, and reviewing investment strategy.
For institutional securities and brokers, there are often transactions between the securities firm and other institutions, for example an investment firm or pension fund. The relevant transactions are as follows, with the list not being exhaustive.
(1) Account management: including opening an account, closing an account, reviewing holdings and balances, deposit funds, and withdrawing funds.
(2) Trading: including placing sell orders, placing buy orders, reviewing and monitoring order status, and regularly scheduled sales or purchases.
(3) Advisory services: including reviewing portfolio, reviewing investment strategy, requesting research and/or reports, requesting/providing buy/sell recommendations, requesting tax advice, and recommending other advisory services.
There are therefore many types of transactions that take place between financial institutions and their customers or affiliates. It should be understood that in this disclosure “financial transactions” refers collectively to the various types of transactions engaged in by financial institutions including the ones referenced above, as well as other similar transactions, whether existing or to be conceived.
When one considers the thousands of individual financial institutions around the world, and the millions of customers, the number of financial transactions being executed becomes mind boggling. While automation has made some of these transactions easier and quicker to execute (e.g. via the Internet or at ATM's), there are still many others that still require either personal contact and/or a personal signature.
Financial institutions have generally required proof of identification to avoid fraud. Historically, the main vehicle for authentication had been a valid signature. This requirement was gradually relaxed with the advent of credit cards and electronic transactions which rely on Personal Identification Numbers (PIN's), and other information, as part of the authentication process. Processes based on PIN's, however, have been susceptible to various forms of security attacks.
Also, during this time stricter identification requirements seem to have developed. For example, there seems to be closer scrutiny of passports and visas as we travel. Airlines require more proof and so do cruise lines and others in the travel industry. Individuals who traditionally used their middle names have had to revert to their first names lest their identity be confused.
In the U.S., the Real ID Act (passed in 2005) makes it more difficult for illegal immigrants to obtain identification that the federal government would recognize when they try to board a plane, fill out tax forms or open a bank account. The measure affects U.S. citizens as well and requirements for acquiring drivers' licenses are much tighter. The country continues to move closer to universal I.D. requirements common elsewhere and everywhere we go we are asked for “picture ID” or “two pieces of ID”.
As the need for proof of identity increases so does the requirement for signatures as a proven authentication vehicle. For example, U.S. States now have extensive identification requirements for acquiring drivers' licenses and they list the type of documents they will accept. They usually require at least two types of ID documents and one of the supporting types or secondary documents must have the individual's name and signature.
In addition to a potential authentication deficiency, most of today's more automated transactions suffer from a lack of direct interaction between supplier and client and can be very impersonal experiences. We have all experienced frustration at not being able to “talk to a real person” when we encounter problems filling out an on-line form or at the ATM.
There is therefore a need to automate the many transactions that currently require in-person contact while enhancing the customer service interaction for the benefit of suppliers and customers. There is also a need to provide this automation of transactions in a way that permits an advantageous level of authentication, and that is easy to adopt.
Legal Transactions
Another example of an area where there is a need for a solution for signing documents in multiple locations is in the context of legal transactions involving documents, such as legal agreements requiring signatures by multiple parties, at least some of whom are in different locations. It is quite common to negotiate legal agreements between parties in different locations and then have to organize obtaining the various signatures of the multiple parties. Often a single party has multiple signing authorities, and such signing authorities may be dispersed geographically at the time their signature is required. Sometimes this is addressed using fax counterparts with the disadvantage described below. Electronic signing technologies involving Public Key Infrastructure, for example, are cumbersome as it is quite likely that at least one of the signatories has not signed up or does not have access to their key store at the time signature is required. For these and other reasons, despite advancements in technology, the preferred method is still to organize closing meetings where the various signing representatives assemble in a single location in order to facilitate the collection of original signatures of all of the signing representatives at one time and in one place. The closing meeting provides satisfactory authentication of the documents in that original signatures are obtained from individuals attending the closing meeting such that other signing representatives or witnesses can attest to the fact that the signing representatives were in attendance and had signed particular document. Alternatively, arrangements are made to circulate original copies of agreements one by one until other signatories in different locations have affixed their signature. This is less desirably from an authentication perspective. Either of these solutions is time consuming, relatively resource intensive. The closing meeting in particular carries significant cost when one considers travel time, travel expenses, as well as the loss in efficiency of the signing representatives who are not normally and their normal output levels even if they are not directly engaged by the transaction negotiations or the closing meeting, because of the distractions involved in the group setting for example.
Existing Solutions for Authentication Using Signature
One of the major impediments preventing the automation of many transactions is the need for a legally valid signature. In-person signatures are still typically required for loans, new accounts, contracts, etc.
Faxes are still used by many companies for order processing and are also an accepted way to convey a signature for contracts such as real estate purchases or sales. Also, there are always contracts that require an actual signed document or that will only accept a faxed signature if it is notarized. Even if faxed signatures were to become acceptable in all cases, they have a major drawback in that the signature could be a forgery. Accordingly, in many cases signature using fax counterparts does not provide a desirable level authentication. In addition, while faxes may solve the signature requirement, they do not help enhance the customer service interaction.
While this disclosure refers for the most part to “signatures” it should also be understood that other forms of handwriting including initials or handwritten modifications to contracts present similar issues as do signatures, and which are addressed by the present solution. “Signatures” should not therefore be read in a limitative sense.
Electronic or digital signatures are gradually becoming more acceptable. A signature can be scanned into a computer and then sent via the Internet. Alternatively, the whole contract and signature can be scanned and e-mailed. Infrastructures based on the use of unique digital signatures such as Public Key Infrastructures (“PKI”) are well known. The use of electronic signatures offers speed advantages over faxing, however, this method can still allow forgeries and does not resolve the customer interaction problem. Also, there are problems with the adoption of systems based on digital signatures because they generally require a relatively significant departure from established practices for engaging in financial transactions.
A video conference between the two parties to a contract or transaction is a means for authentication. For example, one party could sign a contract in full view of the second party and then either fax or scan/e-mail the signed contract. The second party would then add his/her signature and send the duly executed document back. While this method is relatively speedy and appears effective, it still has authentication problems. There is no foolproof way of ensuring the signed document faxed or e-mailed is the same one you saw during the video conference.
An issue related to authentication is non-repudiation. One of the requirements of financial institutions is that financial transactions entered into remotely enable the financial institution to evidence that the actual person named in a financial transaction “accepted” the terms and conditions thereof, so that the actual person cannot repudiate the financial transaction. Currently, handwriting is generally used for the purposes of non-repudiation (or in some cases a handwritten initial or hand, but the problems concerning authentication identified above also affect non-repudiation.
Existing Solutions for Customer Service Interaction
Enhancing, or even allowing for, interaction between a customer and the financial institution should lead to increased customer satisfaction and sales. There are several ways that this is currently accomplished.
Increased use of customer service staff accessible via toll-free numbers would satisfy many customer concerns and answer questions when required. This is, however, a costly solution for the institution. It also tends to be somewhat impersonal and does not resolve a signature or handwriting issue that may be present.
As mentioned above, video conferencing can partially solve signature requirements. It also would allow more personal and satisfying interaction as the customer can see the person he/she is talking to. Video conferencing can, of course, be costly and it does not provide a fully-integrated solution to the twin challenges of signature requirement and enhanced interaction.
Webcam communication is another option. A webcam is a camera that records live action—much like a video camera. It attaches to a computer and can upload images and audio onto the Internet so they can be received by a second webcam-equipped computer. Webcams provide a form of video conferencing and could allow customer-institution interaction at, usually, a much lower cost than true video conferencing. The two major drawbacks of webcams are that the quality of the images can be unreliable and the lack of security. The feed from a webcam can be accessible to webcam-equipped computers other than the intended recipient. In addition, webcams do not provide an integrated solution for the signature requirement.
Finally, an increased number of branches would provide the requisite customer service interaction. If customers had access to many more branches that were fully staffed and open 24/7, this would be a much better solution. A customer would simply drop into a branch very close by, there would be minimal waiting and he/she would execute the required transactions while talking to a knowledgeable, “real” person. Needless to say, this solution would be prohibitively expensive for the institutions. It would reverse a long-term trend towards automation and branch reduction and drastically reduce the return on the huge investment in electronic equipment. It would also require a large investment in staffing and training.
Based on foregoing, there is a need for means for conducting transactions on a remote basis with effective means for authentication and non-repudiation while providing interaction between a user and a financial institution.